South Korea Variable-Rate Mortgages Near 40% as Borrowers Chase Lower Rates

Variable-rate mortgages at South Korean banks climbed to nearly 40% last month, a shift that could leave more borrowers exposed as market rates rise.

The jump is widely attributed to a widening gap between fixed and variable mortgage rates after market rates spiked in the short term amid tensions in the Middle East. With mortgage rates rising quickly, the growing share of variable-rate loans is also fueling concerns about a chain of financial stress among vulnerable borrowers and heavily leveraged households.

According to the Bank of Korea on Tuesday, variable-rate loans accounted for 39.2% of deposit-taking banks’ mortgage balances as of the end of March, up 10.3 percentage points from 28.9% a month earlier. The share has risen sharply this year, from 13.4% at the end of last year to 24.4% at the end of January, then 28.9% in February, and higher again in March.

Variable-rate loans reset periodically in line with market rates. Typically, when rates are rising, borrowers prefer fixed-rate loans because they lock in interest costs and make budgeting more predictable.

Even so, borrowers have been gravitating toward variable rates because they are cheaper upfront. The view is that many are choosing to cut near-term interest costs even if they face higher payments later, as the rate gap is close to 1 percentage point.

As of Tuesday, fixed-rate mortgages at the five major banks — KB Kookmin, Shinhan, Hana, Woori and NH Nonghyup — were quoted at 4.28% to 6.88% annually for products that reset every five years. Variable-rate mortgages that reset every six months were 3.65% to 6.05%. Fixed rates were higher by 0.83 percentage points at the top end and 0.63 points at the bottom end.

The concern is that the shift toward variable-rate borrowing could translate into heavier repayment burdens. Because variable rates reflect market moves at set intervals, borrowers’ interest costs tend to rise in a tightening cycle.

Mortgage rates have already been climbing. The Bank of Korea said the average rate on newly issued bank mortgages in March was 4.34% annually, up 0.02 percentage point from February, extending gains for a sixth straight month since October.

The outlook remains uncertain, with Middle East tensions still unsettled and war-driven oil price spikes potentially feeding into inflation and higher interest rates. Korea Investment & Securities said in a report Monday that it expects the central bank to raise its policy rate twice in the second half of this year, in August and November.

A financial industry official said variable-rate loans are structured to increase borrowers’ interest burdens if rates keep rising. If higher rates coincide with a weakening economy, the official said, repayment capacity could deteriorate among self-employed people and low-income, vulnerable borrowers, pushing delinquency rates sharply higher.